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One of the option trading strategies that I've been able to achieve some success is trading a call option of a company which has just announced a stock splits.
Generally, stock splits occur when the company shares have risen to a price where the management felt that it's advisable to split them so that they would be more affordable to investors. For example in a 2-1 stock splits, a share selling at $100 would become 2 shares of $50 after the stock splits adjustment date.
There are various kinds of stock splits, the common being 2-1 & 3-2. The stock would gap up in most instances when a stock splits was announced. If the market was generally bullish when the stock splits was announced, the stock would normally rise gradually from the time the announcement was made till the the date the stock splits was adjusted, the period of which is usually about 1 month. Sometimes on the day in which the stock splits was adjusted, the stock might even gap up further if the stock is a strong sector or industry leader and the market is bullish.
I have found more successes buying call options when stock spilts were announced by companies which were industry/sector leaders with a daily trading volume of more than 1 million shares. I also only stick to shares announcing 2-1 stock splits and of course the shares there were optionable.
Here's a web-site where you could check up-coming stock splits for optionable stocks :
Briefing.com - Splits Calendar
I would usually buy a 2-months out call option or the expiration month which would at least cover the day of the actual the stock splits adjustment (note : to cover the day when the adjustment would be made and NOT the day the splits was announced).
I don't necessarily hold the call option till the stock splits adjustment date hoping that it will gap up on that day. Normally when I've found that the stock has risen to a profitable position after holding the call option for a while (ie. I bought the call option was stock splits was announced and intend to hold it till stock splits adjustment day) but the stock has started showing signs of trend reversal or pull-back, I would not hesitate to sell the option for a nice profit.
To check whether a particular share is an industrial/sector leader, you can go to
Yahoo! Finance, key in the ticker symbol and click on the "Industry" link on the left. Then scroll down to see the "Market Capitalization" information and check whether it is ranked at least
at position 1 or 2. You can also check the trading volume in the same web-site.
To get email alerts of stock splits the moment that they are announced, I would recommend that you subscribe to
StockSplits.net. It's free.
There's also an excellent report "Trading Optionable Splits" written by Mr Kevin M. Harper available free at
OptionReports.com
Simply complete the on-line form at the right and you'll receive an email with a link leading you to the page to download the free report.
Stock Splits is just one of the method in which you could trade options profitably, if you are interested to learn other situations where you could trade options profitably, I would encourage that you sign up for the Lively Freely Options Trading Seminar, where I’ve gained more in-depth knowledge of options trading from.
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